Sign O' The Times
A little bit of bait and switch here. Usually, Fridays are reserved for some sort of column on music but today is something different.
With the closing of the CME’s open outcry pits for agricultural products, one of the last actual physical trading arenas, I just couldn’t let it pass without writing something.
The reasoning behind this closing, and for the closing of almost every other trading venue that had some human component, was cost and speed. Traders are competing with algorithms and high speed trading systems that effectively execute hundreds of trades in milliseconds. They execute these trades for very virtually no cost and the theory is that this reduction in cost will be passed on to the ultimate investor.
Granted, most brokers now will execute trades for no cost and inherent in those executions is speed as well. So, the individual customer gets a quick execution and it cost him/her nothing and that would seem to be a perfect world for traders. With the advent of Robinhood and other low cost online brokers, anyone with a credit card and a cellphone can be a “playa'“.
Not one person using these apps has ever given any thought as to how these brokers make money. Why should they? It’s free, it works (almost all the time), and you don’t have to know the actual rules and regulations in the securities industry. They say they are democratizing investing by allowing everyone access to the same markets that the big guys trade on and for free!! They say that they are creating a whole new class of informed investors and therein lies one of the bigger problems of this new investing class. Used to be you had to be an accredited investor. Someone with some knowledge about investing and its risks. Not anymore. Warren Buffet and Chairman Gensler of the SEC are 100% right, these apps create a casino like atmosphere to investing. And it’s all free!!
This has been a problem with a whole generation of adults who have grown up with the belief that everything on the internet can be had for no cost. It might have started with Napster, I don’t really know when it started but the “No Cost is the Right Cost ethos has taken over a whole generation of people. We have a raised a whole generation that works hard to build ways to get things for free. What this generation seems to have a hard time understanding is that as you cut costs, there is a human impact that they eventually will feel.
Having spent over 37 years on the floor of the NYSE I saw firsthand the evolution to almost no cost transactions. We were always under pressure to lower our commission costs to clients and we succeeded for a very long time keeping rates at a level where both parties felt that was fair. However, in the end, the pressure from management of the various funds we dealt with, forced us to lower rates continually. The bean counters on the management side saw the easiest path to profits was lowering execution costs. The fact that eventually the quality of executions would suffer didn’t matter. Quality of execution was a very hard thing to show to investment committees but lower costs was easy. With lower revenues, firms cut back and customers began taking full advantage of technology and bypassed the floor broker and relied on an electronic execution more and more. The speed that investors had asked for was now there, the low cost was now there, disregarding quality for quantity.
The NYSE, to its credit still maintains a hybrid market. There are still brokers making markets and trading on a daily basis. The Exchange has just announced that it will be allowing all participants back on the floor in the next few weeks. Of course Covid protocols will still need to be met but for all the haters, this proves the resiliency of the NYSE and its members. Trading is different from the days of open outcry but the advantage of having someone take full interest in the outcome of any execution is worth the price.